South Africa’s exclusive R10-billion Capex Club

If you do not have R10 billion to invest in your network each year, don’t even think of taking on Vodacom and MTN. At least not on a national scale.

Vodacom’s latest financial results revealed that it invested over R11 billion in its South African network over the last year. It will do the same over the next year.

These investments are necessary to catch up with MTN, which has invested over R50 billion in its South African network over the last five years.

In recent years, MTN has built up a substantial network quality lead over Vodacom. MTN’s average download speed is nearly double that of Vodacom’s.

Vodacom is fighting back, but regaining the “best network” crown will not be easy.

MTN continues to invest over R10 billion per year in its network and has already built up a substantial 5G lead over Vodacom.

The “best network battle” between Vodacom and MTN is excellent news for South African consumers who enjoy world-class mobile networks on the Southern tip of Africa.

However, it is not so great for Telkom and Cell C.

The smaller operators do not have the same capital expenditure (Capex) muscle and cannot compete on a national scale with Vodacom and MTN.

Telkom invested R4.5 billion in its mobile network over the last year — and R15 billion over the last five years. It is around 30% of what Vodacom and MTN have spent.

Cell C, in turn, has thrown in the towel trying to compete with the big two. Fifteen years of building and maintaining a mobile network have crippled the operator financially.

Cell C has now partnered with MTN and Vodacom to piggyback on their networks. This strategy has helped it to cut its network investment from R2.3 billion per year to only R195 million.

Cell C CEO Douglas Craigie Stevenson said it is impossible to compete with Vodacom and MTN’s network investments.

Its new strategy is to partner with them instead. It gives its subscribers the benefit of an excellent network footprint without spending billions on building and maintaining a network.

The charts below show the annual mobile network capital expenditure for Vodacom, MTN, Cell C, and Telkom over the last five years.

But wait, it gets worse for smaller operators

Mobile network Capex should not be viewed as an isolated number. It is of more value to evaluate it in relation to mobile revenue — a ratio referred to as “capital intensity”.

Capital intensity is capital expenditure as a percentage of revenue. It tells you what percentage of income an operator spends on their network.

Big operators have a huge advantage over smaller operators because it costs the same to build and maintain a network, independent of how many subscribers you have or how much money you make.

The more subscribers you have and the more money you make, the easier it is for you to invest billions in your network.

For example, when Vodacom invested R11 billion in its network, it used around 14% of its revenue.

MTN, in comparison, used 21% of its revenue to invest R10 billion in its network.

If Telkom wanted to invest R10 billion in its mobile network, it would have to use over 50% of its mobile revenue. It is entirely unsustainable.

Capital intensity is the main reason smaller operators cannot build national networks that compete effectively against Vodacom and MTN.

The charts below show the network investments of Vodacom, MTN, and Telkom over the last year, along with their capital intensity.

It illustrates that Vodacom can invest more in its network, but with a far lower capital intensity, than MTN and Telkom.

So, how does Rain make it work?

The inability of smaller operators to compete against Vodacom and MTN raises the question — how is Rain making it work?

Rain realised from the outset that it could not outspend the big guys. Instead, it partnered with Vodacom to limit Capex and optimise the value of its spectrum.

Rain built a national LTE network funded mostly through Vodacom roaming revenue.

Rain sidestepped the debt trap which comes with building a new mobile network — the main reason Cell C landed in serious financial trouble.

With a growing subscriber base and little debt, Rain started to build a 5G network.

However, it is not a national network. That would require a tremendous network investment and create an unsustainable capital intensity.

Rain is cherry-picking suitable areas where there is strong demand for fixed-broadband access to make it work. In short, it goes where the loot is.

Therefore, Rain is not trying to compete against Vodacom and MTN on a national mobile network. It knows it will lose.

Instead, it is a 5G fixed-broadband provider with lower Capex requirements than its main competitors — fibre operators.

To provide mobile services, Rain partnered with Vodacom to carry the heavy Capex burden.

Now read: Best mobile network in South Africa at the beginning of 2022

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South Africa’s exclusive R10-billion Capex Club